Inflation Upside: I Bond Rates Are Back Above 4%

For the first time in two years, interest rates on Series I Savings bonds, known as I bonds, are going up.

On Friday, the Department of the Treasury changed the rate for I bonds purchased within the next six months to 4.03%, up slightly from 3.98%. The increase is due to unruly inflation between April and September, which are the months the Treasury Department uses for its November rate calculations.

“I remain a fan of I bonds as a medium- to long-term investment,” says David Enna, the founder of the financial site TIPS Watch that closely tracks I bonds. He adds that at 4.03%, short-term investors will get a decent return, too.

I bonds, which are available for purchase on TreasuryDirect.gov, are uniquely designed to protect savings from rising prices. They became incredibly popular in 2022 when the rate topped 9% for the first time ever due to soaring pandemic-era inflation. While rates have fallen since then, experts say the government savings bonds are still one of the only reliable hedges against inflation.

“I bonds are a unique investment, one of the safest in the world, because they are backed by the U.S. government and provide protection against official U.S. inflation,” Enna wrote on his site. “No matter how high it rises.”

How I bonds work to fight inflation

Every six months, part of I bonds’ overall interest rate is recalculated to factor in changes to inflation. This is called the variable rate and is currently 3.12% annualized.

The other rate is called the fixed rate, which stays the same over the life of the I bond, up to 30 years.

The Treasury Department set the new fixed rate to 0.9% on Friday, down slightly from 1.10%. That means I bonds purchased between now and the end of April 2026 will come with a fixed rate of 0.9% for up to 30 years — guaranteeing a return on top of the rate of inflation.

While the variable rate is predictable and based directly on inflation, the fixed rate is a block box. The Treasury Department does not publicly share how it determines this rate exactly, but we do know it is affected by benchmark interest rates like many other investments, and those are heading down.

However, Enna believes he has cracked the code and has accurately predicted I bond rates for several years. Last week, shortly after the Bureau of Labor Statistics released its (delayed) inflation report, he forecasted the new I bonds rate at precisely 4.03%.

Enna says he is hoping the fixed rate for I bonds will stay at 0.9% into the future. But that depends on how the Federal Reserve’s war against inflation pans out.

"The I bond fixed rate will likely fall as the Fed cuts rates," says Ken Tumin, a savings rate analyst at Deposit Quest.

Investors who want to lock in the 0.9% rate to ensure returns above inflation will need to purchase their bonds before then, Tumin says.

Are I bonds right for you?

In addition to their inflation-fighting design, I bonds have other key pros and cons investors should consider before buying.

Unlike other investment and savings accounts, earnings on I bonds are not subject to state and local taxes, and federal taxes are due only once the bonds have been cashed out.

The bonds have some caveats, as well. They must be bought digitally through TreasuryDirect.gov and have a $10,000 annual purchase limit. They must be held for at least one year, and bonds cashed out within five years of purchase incur a three-month interest penalty. (Paper I bonds, which you previous could buy with tax refund money, were discontinued in January.)

These caveats are why many financial experts see I bonds as a longer-term hedge against inflation rather than a short one.

Everyday savers have money-market accounts, high-yield savings accounts and certificates of deposit (CDs) to consider as alternatives.

Currently, the best money-market accounts and CDs are offering rates up to 4.25%. Meanwhile, rates for high-yield savings accounts are topping out around 4.35%.

It’s important to note, however, that these rates can change as often as banks like — and without advance notice. Across the board, interest rates on savings accounts tend to fall shortly after a rate cut from the Fed, like was just announced on Wednesday.

By contrast, the overall rate for I bonds (4.03%) is guaranteed for six months, and the fixed rate (0.9%) is guaranteed for up to 30 years.

"I bonds are a good choice for savings that you will likely not need for a few years down the road," Tumin says. "Unlike CDs and HYSAs, the I bond will ensure your savings stay ahead of inflation."

This story has been updated with additional comments from Ken Tumin.

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